Small savings, big plans

Pension products, by definition, are long-term schemes that spread over decades. India is in dire need of resources to fund its infrastructure needs. Creating a well-developed and regulated pensions market can ensure that thrifty Indians can bridge the cash deficit for India's infrastructure sector to a large extent.

Frugal households could well turn out to be the primary financiers of these mammoth projects. India's savings rate could reach 40% of GDP in the next few years and can potentially be sustained at high levels for well over a decade.

Several countries including Australia, Canada, Mexico and Chile have amply demonstrated that pension funds and insurance companies have helped jump-start infrastructure investment. It's time India emulated this model which could potentially catalyse every sector, from farm to factory.

The Pension Fund and Regulatory Development Authority (PFRDA) Bill 2011, which the Lok Sabha passed on Wednesday, needs to be seen in this context. The Bill, after the Rajya Sabha passes it, will pave the way for setting up a statutory watchdog for the sector aimed at providing social security to millions of employees through efficient intermediation of long-term household savings.

Currently, the pension sector has its own regulator, the PFRDA. But, unlike the other financial sector supervisory bodies, the PFRDA does not enjoy statutory or quasi-judicial powers and, therefore, cannot clamp down on violators or impose penalties.

The legislation will now arm the PFRDA with requisite powers. Once the Bill is enacted India could see pure pension products available to those employed in the private sector, which would be governed by a regulatory authority.

Currently, most pension plans are insurance-linked. It will allow for withdrawals for specified purposes and subscribers will be able to choose from a range of schemes, including those linked to investment in stock markets as well as low-risk government bonds that may offer assured returns.

Pensions are only one part of the long-term household savings pie. The other slice — insurance — has also been hobbled by lack of capital with no political consensus on the government's proposal to hike the foreign investment ceiling from 26% to 49%.

If laws are amended to allow higher foreign investment in the insurance sector, the same will also be applicable to the pensions sector. The time may have come to bite the bullet on this as well to channel idle savings into productive sectors and long-gestation projects.